Crimes Against Liberty (36 page)

Initially, the bill would establish a revolving emergency loan fund of up to $50 billion for “emergencies” (as defined by Congress) to use to close or restructure distressed financial firms.
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Promising the fund would only be used to wind down failing firms, Democrats claimed the regulators would have little flexibility in how it was allocated because its purpose was not to bail out companies, but to keep firms afloat while the government liquidated them. At any rate, the provision authorizing the fund was later removed in an effort to mollify opponents who argued it would amount to a permanent TARP fund since Congress would have the fund at its disposal, without having to pass authorizing legislation each time.

But while many Republican critics argued that this $50 billion fund was the main problem with the bill, others, such as Senator Bob Corker, warned unlimited bailout powers would still exist apart from the fund. In an interview with
National Review Online
, Corker said the real danger is in the fine print, which confers on regulators the power to bail out firms that aren’t yet technically insolvent. Even without the fund provision, the government could still exercise its unlimited discretion to break up or bail out firms not yet insolvent via the Fed making loans and accepting “the shadiest of assets (such as subprime-mortgage-backed securities) as collateral,” or through FDIC guaranteed loans.
National Review Online
’s Stephen Spruiell commented, “The only difference is that, rather than being able to ‘pre-fund’ the resolution authority and cap it at $50 billion, the government would ‘post-fund’ the resolution of a failed firm by borrowing whatever it needs from the Treasury and then sending Wall Street the bill.”
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“A CURE FAR WORSE THAN THE DISEASE”

Like ObamaCare, the financial reform bill would likely yield results exactly opposite from those Obama promised. He said he wanted to end the “too big to fail” era, but experts believe his reform would enshrine that very concept into law. This new “all-powerful bureaucracy,” says Heritage expert David C. John, would “actually make future crises—and bailouts—more likely.”
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The bill makes it “more likely that those same institutions that made risky bad bets before will make the exact same mistakes again.” This is because the government’s advance promise to bail out companies “too big to fail” reduces the checks creditors naturally exercise over banks by, for example, demanding higher interest rates on loans to banks that are highly leveraged. With the government’s backing, creditors would be less cautious about making riskier loans.
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Carl Horowitz agrees, noting that the command-and-control model envisioned by the Dodd bill is “a cure far worse than the disease, triggering major misallocations of resources. Rewarding political allies and punishing enemies would become prime criteria for making business decisions.”
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Under this bill, the risk of collapse will intensify, because big financial firms will be spared the risk that encourages them to act responsibly. The Dodd bill, says David John, “does nothing to reduce the systemic risk of today’s ‘too big to fail’ financial institutions or to prevent this risk in the future.”
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What it does do, ironically, is enhance the government’s sweetheart protection for the very firms from whom Obama claims he’s protecting us—quite the sophisticated hustle.

Heritage’s James Gattuso prepared a non-exhaustive list of “14 Fatal Flaws” in Senator Dodd’s bill, a bill which, Gattuso argues, would make “another financial crisis or bailout
more
likely to occur.” According to Gattuso, the bill would:
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• Create a protected class of firms that would be subject to “enhanced regulation.” This would send a signal that these firms are too big to fail and encourage them to take “undue risk.” It “will be like creating Fannies and Freddies in every sector of the economy.”

• Provide for seizure of private property without meaningful judicial review.

• Create permanent bailout authority. As David John wrote about Obama’s earlier plan—and the same essential arguments would apply to Dodd’s bill—the Fed would have power to consider “unspecified factors” in its determination and “exercise discretion” in evaluating those factors, which translates into “openended power” that “would be difficult to constrain and should be resisted.” Under such a law, investing the government with broad authority to assume control of banks and inject them with cash, coupled with the power to assess penalties on bigger firms to pay for the intervention and cash injections after the fact, just imagine the temptation of a statist like Obama “exercising his discretion” to step in even in marginal cases, knowing that costs could be covered by penalties imposed in the future. What a seamless scheme for further wealth redistribution!
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The bottom line, in John’s view, is that Obama’s financial plan “would give government regulators almost unlimited powers to take over or micromanage financial institutions.”

It’s hard to argue with John’s conclusion when you consider the words of Senator Dodd, himself: “Cracking down on the biggest players is critical to ending bailouts. And if a Wall Street firm does become too large or too complex and poses a grave threat to our financial stability, the Federal Reserve has the power to restrict its risky activities, restrict its growth, and, Mr. President, even to break up those institutions.”
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Obama-finance will mean expanding federal control over financial institutions in the name of economic stability and preventing future economic catastrophes caused by firms deemed “too big to fail.” Democratic congressman Brad Sherman, in an interview with
Politico
, confirmed, “The Dodd bill has unlimited executive bailout authority. That’s something Wall Street desperately wants but doesn’t ask for. The bill contains permanent, unlimited, bailout authority.”
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• Open a “line of credit” to the Treasury for additional government funding, which provides additional taxpayer financial support.

• Authorize regulators to guarantee the debt of
solvent
banks, if regulators determine there is a liquidity crisis.

• Give the Bureau of Consumer Financial Protection broad powers to limit what financial products and services can be offered to consumers. The stated purpose is to protect consumers, but the effect would be to reduce consumer choice—reminiscent of ObamaCare.

• Give this bureau its own staff and autonomous rule-making authority, and the ability to examine financial institutions with more than $10 billion in assets. John warns with this autonomy it could pass regulations that could endanger the stability of the financial system with Congress having no ability to veto such regulations in advance—before the damage is done.

• Subject non-financial firms to financial regulations. This could lead to “a broad swath of private industry” being “ensnared in the financial regulatory net.”

• Do nothing to address problems at Fannie and Freddie. “There is still nothing in this bill that addresses the perverse incentives and moral hazard that is created when the federal government sticks its nose into the housing market.”
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Another major problem with the bill, highlighted by
National Review’
s editors, is that it would give unions “proxy access... under the guise of bolstering shareholder rights.” This would “greatly expand Big Labor’s influence over American corporations,” because it would facilitate consolidated voting by large and politically powerful shareholders, such as union pension funds. “Big labor’s agenda will often conflict with the goal of maximizing shareholder value” and “sound corporate management, which the unions would seek to undermine.”
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Despite the bill’s myriad dangerous provisions, the Senate passed it on May 20, 2010, by a 59 to 39 vote with just three Republicans voting for it, after which it headed to a House-Senate conference committee. Senate majority leader Harry Reid bragged, “When this bill becomes law, the joy ride on Wall Street will come to a screeching halt.” After all his savaging of banks, Obama, with a straight face, announced, “Our goal is not to punish the banks.”
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Republican senator Judd Gregg added, “This bill is a disaster because it doesn’t address the fundamental underlying causes of the economic issue, which were real estate and underwriting.” Of the bill’s newly formed Consumer Protection Agency, he said, “It’s going to become an agency which defines lending on social justice purposes . . . versus on safety and soundness of purposes.”
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Gregg couldn’t be more correct. Just as with the subprime mortgage fiasco, government bureaucrats will be forcing banks to make loans to people and institutions that are poor credit risks, which will likely have the same disastrous consequences as the Democrats’ similar policies toward Fannie Mae and Freddie Mac.

GOLDMAN NEEDS NO PROTECTION FROM ITSELF

For all of Obama’s demonizing of banks, it was his party that sided with Wall Street on this issue. Heritage’s Conn Carroll wrote, “It is ‘the big Wall Street banks’ that are supporting the Geithner permanent bailout plan.” It was Obama, not some Republican, who “raised about a million dollars from Goldman Sachs employees and executives in 2008, the most any politician has raised from a single company since McCain-Feingold.” Indeed, just as Obama’s push for his financial overhaul package was intensifying, Goldman Sachs promoted the bill in their annual report to shareholders. Goldman CEO Lloyd Blankfein and President Gary Cohn stated in their introductory letter accompanying the report, “Given that much of the financial contagion was fueled by uncertainty about counter-parties’ balance sheets, we support measures that would require higher capital and liquidity levels, as well as the use of clearing-houses for standardized derivative transactions.”
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Goldman’s support for the overhaul plan was suspicious, just as was the ultimate support of pharmaceutical companies for ObamaCare. As usual, an element of sleaze appears to have oozed into an Obama “reform” proposal. So what did Goldman have to gain in exchange for folding? According to the
Washington Examiner
’s Timothy Carney, Goldman “want[s] the government to reduce the risk that Goldman’s debtors or insurers will run into trouble.”

Blankfein’s statements lend support to that view. He wrote, “The biggest beneficiary of reform is Wall Street itself. The biggest risk is risk financial institutions have with each other.”
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In other words, Blankfein appears to have no objection to the government propping up his fellow “fat cats.” This was, said Carney, an “odd function of government: making Goldman Sachs feel safer in its business dealings.” Also enticing to Goldman, noted Carney, was that these stricter government requirements were designed to renew American investors’ confidence in the stock market, which would hopefully lead to financial firms lending more and Goldman type firms thriving on the “free-flowing capital.”
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The Obama administration employs many Goldman alumni-lobbyists, including Chief of Staff Rahm Emanuel, White House economic advisor Larry Summers, and Treasury chief of staff Mark Patterson. “So who,” asks Carroll, “is really on the side of the American people and who really is doing the work of Wall Street lobbyists?”
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Another wrinkle arose when the government filed civil fraud charges against Goldman. The timing of the suit, just as Senate debate on the bill was ready to begin, was highly suspicious, though the SEC claimed it was acting entirely independently from the administration. The White House professed not to have known in advance about the SEC’s plans to file the suit, but Press Secretary Robert Gibbs nevertheless admitted the complaint helped the cause of financial reform, because it “is a prescient reminder of what’s at stake.”

The White House’s denial of a link between the SEC charges and its efforts to pass the financial reform bill became more suspect when the Democratic National Committee bought online ads capitalizing on the Goldman case.
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Internet surfers entering “Goldman Sachs SEC” in Google were directed to the president’s website by way of a sponsored link titled “Help Change Wall Street.” The web page had a photo of Obama with the quote, “We’ve seen and lived the consequences of what happens when there’s too little accountability on Wall Street and too little protection for Main Street. It’s time for real change.”
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Even if there was no collusion between the White House and the SEC, the political exploitation of a civil suit by the administration was unconscionable.